Wwp Plans Life Without Sierra Spokane Utility Ponders Its Options After Pulling Out Of Proposed Merger

Altus Corp. is dead. Long live … Washington Water Power Co.?

When the Spokane utility called off its proposed marriage to Sierra Pacific Resources a week ago, the search for a path into the future did not end.

Even as he discussed the reasons WWP directors decided not to go through

with the merger to create Altus, WWP Chairman Paul Redmond said other utility combinations are likely.

“That is probably in the future for a lot of companies in the industry, including us,” he said.

Or the company could split itself into semi-independent businesses better able to respond to different regulatory and competitive environments, he said.

“Our intention is to present our plan to our board in August,” he said. “It would be a different way of operating.”

WWP’s dilemma is that of the utility industry as a whole. As monopolies, the companies until the last decade generated, transmitted and delivered virtually every kilowatt used by homes and businesses.

But legislation and other measures like those that broke up the natural gas and telecommunications industries are closing in on electric utilities.

The results could be as dramatic as those now confronting consumers with a blizzard of options for telephone service.

Conceivably, homeowners could one day choose between WWP or Inland Power & Light Co. just as they select AT&T or Sprint.

The outcome of WWP’s internal talks will be crucial for Spokane and the Inland Northwest. Not only is the company among the area’s largest private employers, its low rates help keep the cost of living down for its 290,000 customers.

There is little agreement among observers about what is best not only for WWP, but for other utilities struggling with the changing energy market and conflicting regulatory signals.

“The world is changing a lot faster than we thought it would,” Redmond said.

On that point, there’s plenty of agreement.

“The best defense is to be a healthy company,” said Larry Gunnoe, president of Boise-based Idaho Power Co.

Idaho Power, with its abundant hydropower resources, is a near twin of WWP’s electrical operations. It was frequently mentioned as the missing piece of the Sierra merger because its transmission lines were the link between the two utilities’ service territories.

But Gunnoe said much of the one-time savings created by mergers is lost in the grueling process of moving the transactions past the gauntlet of regulators.

WWP and Sierra, for example, spent $30 million trying to merge. At the same time, the estimated $450 million in savings from eliminating duplicated services that the deal was supposed to produce over 10 years gradually diminished.

“It’s hard to say one must merge or be acquired later,” Gunnoe said. “Is bigger better at all?”

He suggested one alternative would be an exchange of assets that would allow one company to focus on power generation, for example, while another expands its transmission business.

The Federal Energy Regulatory Commission is already pushing companies in that direction. In a series of orders, the agency will require utilities by year end to treat all users of their transmission grid the same, with no preference given generation operators from the same company who may be sitting a few doors down the hall.

Gunnoe said traditional utilities - those that generate, transmit and distribute their own power - might also ally themselves with any of the dozens of independent power providers and brokers who have sprung up overnight to pick off some of their choicest customers.

Some of those operators are veterans of the deregulated natural gas market, where they have picked up experience in skills like risk management, he said.

In Spokane, Pan Energy Power Services Inc. is just such an operation. Director Steve Kern said the office hopes to tap the vast customer base of PanEnergy Corp., its parent company and one of the largest natural gas providers in the country.

“Part of what is going to drive this is what the customer demands,” he said.

A former WWP employee, Kern said the utility probably is not large enough to prosper on a relatively small customer base when competition is squeezing margins.

“The real key is to get the level of sales up,” he said.

“You have to be big to offer all the services,” agreed Ed Tirello, a stock analyst with NatWest Securities in New York.

A noted advocate of consolidation in the utility industry, Tirello said Sierra and WWP are too small to stand alone.

“At some point, the competition will just be too great,” he said, predicting that Sierra in particular would continue its search for a mate.

The Reno utility’s chairman indicated that, indeed, executives will go courting.

“We will not sit idly by,” Walter Higgins said last week.

Company executives will again go through the exercise of plotting long-term strategy so they can keep up with growth in the booming Reno area, he said.

The question, Higgins said, is, “What are you good at, and what do you want to be when you grow up?”

He said the days of traditional utilities are numbered, but added that WWP and Idaho Power might survive because their costs are so far below those of most potential partners.

Not everybody is buying the bigger is better theory.

Standard & Poor’s analyst Cheryl Richer, who foresaw the merger collapse, said smaller companies can be more nimble, and closer to the customer.

“It’s not like big utilities are so much more efficient,” she said.

Richer said WWP is a well-run company that has been successful expanding its wholesale energy business. On that basis, she said, she upgraded the company’s debt from A- to A.

Public power interests in the Northwest also are unimpressed by size. Inland Power & Light Co. Assistant Manager Dave Clinton said the Spokane-based cooperative has been able to stay competitive with WWP despite having far fewer customers on each mile of its distribution system.

He predicted WWP would split its operations to maintain its competitiveness.

Mark Crisson, director of Tacoma City Light, said the logical conclusion of the bigger-is-better theory is an industry with just a handful of players.

He already split his operations into separate generation and distribution divisions to meet the challenge.

WWP’s low-cost resources give the company a natural advantage over its competition, said Richard Hemstad, a member of the Washington Utilities and Transportation Commission.

“They also have first-rate management,” he said.

Sara Patton is the director of the Northwest Conservation Act Coalition, an advocate for conservation and low-income ratepayers.

She said mergers would move decision-making powers further away from citizen groups and others trying to influence utility practices.

WWP, Patton said, has been very responsive to the coalition’s concerns.

She said WWP pledged to increase low-income weatherization and take other steps in return for the coalition’s support of the Sierra merger.

“They have delivered on those promises even though the merger did not go through,” she said.

Pete Forsyth has been a tough-minded observer of the changes in the utility industry as regional energy manager for Kaiser Aluminum Corp.

“It isn’t what I did for you yesterday, it’s what am I going to do for you tomorrow,” he said.

Kaiser last year signed an innovative deal with WWP that broke its dependence on the Bonneville Power Administration for the first time.

If WWP and other utilities are to succeed, they will have to meet their competition head-on, Forsyth said. “I think they have that kind of mindset.”

, DataTimes